Bankers are a Force for Good – Debate

Estimated reading time: 9 minutes

For the Motion – Jon Parker*

 

I have a confession to make……I was a banker. When I say that, what I mean is that I once worked for a bank – along with around 1.2million other people in the UK. Now, there was a time when admitting such a thing would have meant you were held in high regard by others in society. Today however, it the eyes of many people, things have changed. The word, ‘banker’ has become synonymous with greed, inequality and all that is perceived as wrong with the capitalist system which the vast majority of people around the world now live under. In fact, so bad have things become that banker is now virtually a swear word.

I have a huge task ahead of me today and it is my job today to convince you that bankers always have been and remain a force for good and that they have been unfairly scorned in the media and by society. By the end of today’s debate I hope to have convinced you that, in the words of David Cameron, you should go out and hug a banker.

The majority of the facts and figures that I’ll use today to try and convince you of the essential contribution that bankers make to our lives are taken from the most recent data for Barclays. Now I am using Barclays for two very good reasons: firstly, because I used to work for them and therefore is the bank which I know most about; but secondly, they are from a UK bank perspective the most global and arguably seen as the poster child for much that is wrong.

 

What Do Banks Do?

To win your hearts and minds in this debate, I believe that it is important that we first go back to basics — establish what it is that banks actually do so that we can properly define precisely what a banker is. When you think of the word ‘banker’ what image comes to mind? The friendly face at your local high street branch who is on hand to help you with a personal loan, mortgage or savings account. These people are, of course, bankers.

Now, another image that may not immediately spring to mind is this……This is an image of John Freame……a banker in 1690 in London who is regarded as the person who established Barclays. Now, John Freame was not only a banker, but also a Quaker and the three key founding principles which were embedded in the way in which this trade was conducted were frugality, prudence and trustworthiness.

What is the point of showing you these pictures……..it is simply that today’s image of bankers and banking is misconceived and incomplete. There is a lot of confusion around what banks actually do.

At its essence, banking centres on two simple activities:

1. Matching people that have money and want to either save or invest it, with people who want to borrow money for some purpose – house, car, company. Banks charge more to the people borrowing money that they pay to those savings, and therefore
2. Taking risks. In the transaction I’ve just described, there is a risk that the individual or company that borrows money may not pay it back. Banks bring together lots and lots of people with varying needs and if a small fraction of these transactions go wrong, the risk is spread across a wide pool of people.

This is what 95% of banking is all about – standard, harmless activities. This can be illustrated with a few examples of the sort of things Barclays has been involved in over the years, including:

• Funding the first public rail networks – allowing people and goods to travel over much greater distances.

• Passenger liners – effectively creating the global travel industry we know today.

• Helping Morris cars become a global force in the motor industry; and,

• connecting the people of Hong Kong through the financing of their underground network.

Which group of people has done more than any other to improve the standard of living of billions of people around the world over the last 250 years – since the industrial revolution? Now some might say it has been scientists. I would argue otherwise and say it has been the bankers. Without them, the great pioneering inventions of recent times would simply have stayed in the laboratories and benefited only a fraction of the people that they ultimately have done.

The reason that you are able to enjoy all the trappings of capitalism – cars, airplanes, weekend breaks, mobile phones is in large part due to the ability of these people with the great ideas – Apple, Easyjets etc – can raise money is lots of different countries around the world and invest it to make all these things that make our lives immeasurably better. We live in an unprecedented age of opportunity and none of it would have been possible without bankers.

Now, I want to bring this all back to a more individual level. It’s all very well for me to make grand pronouncements about breath-taking technological developments, but how have bankers made each one of you in this room better off…..and I’m afraid you’re going to have to confront some very inconvenient truths.

Does anyone is this room own a house? How about a credit card? Who do you think it was who enabled you to enjoy these trappings of modern life?

And finally, what about boring day-to-day banking. We in the West are quite prepared to take advantage of all the benefits which the banking industry and bankers have given to us – credit cards, instant cash etc and what do we expect to pay for all these £billions of investments of many decades: Precisely, £0…….and in fact it’s even worse than this – we are now paid to receive all these services. Sometimes up to £250 every year in things like cash-back, interest etc.

I’m afraid, the banking industry holds up a mirror to all of us and gives us precisely what we as human beings expect…….more rather than less and something today rather than waiting until tomorrow. If anyone is to blame for some of the less wholesome practices within the industry then we need look no further than ourselves.

Now it would of course be naïve of me to suggest that there are not areas of banking that could be improved and I’m sure my erstwhile opposer in this debate will point out many of these to you. The elephants in the room are of course the activities of the so-called investment/casino banks and bonuses.

I asked you earlier on what images came to mind when you thought of bankers………I’d imagine a number of you had something more like this in mind……….and this ladies & gentleman is fairly accurate reflection of what my opposer (Paul Carroll) was engaged in, in his former life as a bond trader on Wall Street!

Let’s put this all in perspective. The vast majority of bankers – people who work for banks – are not paid multi-million pound bonuses and drink champagne for breakfast. The vast majority – over 80% – earn less than £40,000. These figures are taken from Barclays 2014 report & accounts and are representative of the industry as a whole.

Are the 25-30 people who earn over £1milion worth this amount of money? I don’t know, but market forces dictated their salaries. Should we be comfortable than anyone is paid that amount of money – I’m not sure, but that is not the subject for today’s debate.

However what I am sure about is that in earning these large bonuses, this tiny minority create 2m jobs, 12% of all UK GDP, they have made London THE capital city in the world in which to live and do business.

Perhaps the most acute example of this is this man – Ross McEwan, CEO of RBS.

Despite being 81% owned by the UK taxpayer, he has chosen to pay certain number of his staff massive bonuses and those people had played the dominant role in bringing about the 2008 financial crash. Even George Osborne agreed to these payouts. What is the rational for this action? There are only very few people in the world who can get what was once the biggest bank globally back to profitability and get the taxpayers their money back. It is the market that drives these salaries as it does with all professions.

I’ve leave you with one final thought, if we are to solve the very real problems caused by global warming it is going to take a enormous investment of ingenuity and money to develop the new sources of clean energy required. There is only one group able to achieve this on a global basis – the bankers.

 

OPPOSING THE MOTION: Paul Carroll

THAT BANKS ARE A FORCE FOR GOOD

“Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.”

Adam Smith, Wealth of Nations ([1776] 1976), vol. 2, p279

 

“[B]ut those exertions of the natural liberty of a few individuals, which might endanger the security of the whole of society, are, and ought to be, restrained by the laws of all governments. . . . The obligation of building party walls in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

Adam Smith, Wealth of Nations  ([1776] 1976), vol. 1, p345

 

Bankers Are A Force For Good: The Opposition

The Opposition case is that whilst individual bankers may be good people, bankers, acting as a force, CANNOT be a force for good for three main reasons

1. Corporate Structure (as opposed to Mutual Structure)
2. Incentive System
3. Special Nature of Banking Industry as Money Creator

1) Special Nature of Banking Industry as Money Creator.

• Bank loans create deposits, not the other way around, hence create new money
• Money is created by the banking sector without effective constraint. There are constraints upon how fast banks can create money but not on the activity of money creation
• Reserve controls don’t apply to all deposits, have a reporting lag and in any case accounting books are ‘window dressed’, out-of-date and hence unreliable.

2) The Corporate Structure…..

• A corporation–by its very nature–is incapable of conscientiousness.
• It is obliged by law to protect and advance the interests of its shareholders who, given the size of the leading international banks today, are incapable of genuine oversight as the owners of the corporation

• The classical economist Adam Smith himself was opposed to the corporate structure of banks on the grounds that it made them detached from and unconstrained by the persons who owned them.

3) Incentive System

• The incentive schemes in corporate banks reward profitability.

• They have not distinguished between:
• (a) increasing profits by taking on more financial risk and
• (b) increasing profits by–at a given risk level–being more efficient.

 

Therefore:

Bankers’ profits are limited when they can finance investment only. The profits of recent years are possible only when they can persuade the members of society into what are effectively pyramid schemes. That is to say, gambling that the prices of assets will rise. An individual may become wealthy by ‘flipping houses’ but when an entire society (or a significant portion thereof) engages in this speculation it creates an asset price bubble which raises prices without increase in value.

Individual persons and non-banking business which attempt to maximize by increasing leverage reach a limit (what economist Janos Kornai called Hard Budget Constraint). Banks, because they are able to create money have the opposite, a Soft Budget Constraint which permits them to continue leveraging far beyond the effective limits set on other businesses and individuals.

Banks have a natural incentive to maximize profits in this manner. Within banks, the bankers who make lending decisions have a personal incentive to make long term credit contracts wherein the profits (which, if they occur, will do so over years) can be booked immediately using an accounting technique called ‘net present value’.

Hence it is the conclusion of the Opposition that bankers CANNOT be a force for good, not because they are wicked but because they are human and are in a position of irresistible temptation.  An individual banker may resist great temptation but in aggregate bankers do not and are therefore incapable of being a ‘force for good.’ I beg to oppose the motion.

 

Further reading:

Herman Minsky’s Financial Instability Hypothesis;

Janos Kornai’s Hard Budget Constraint vs. Soft Budget Constraint;

David Bholat’s  How Would Adam Smith Fix The Financial Crisis?

 

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• Tagged:
• banking
• financial sector